In Securities and Exchange Board of India v. Abhijit Rajan1, the Supreme Court held that the insider’s intent must be considered before determining whether the insider is guilty of insider trading. If the insider did not intend to take advantage of the unpublished price sensitive information (“UPSI”), the person could not be guilty of insider trading.
The Supreme Court summarised the applicable tests for determining whether a person is guilty of insider trading as follows:
- (i) Is the person an ‘insider’ under Regulation 2(e) of the Securities And Exchange Board of India (Prohibition Of Insider Trading) Regulations, 1992 (“Regulations”)?
- (ii) Is the information “price sensitive information”2?
- (iii) Is the information ‘unpublished’3?
- (iv) Has the person indulged in trading of securities of the company4?
The court held that each of the tests was passed in the present case, viz., the respondent was an insider of a company who possessed UPSI and indulged in trading of the securities of the said company before the publication of the UPSI. However, for reasons set out below, it held that this was insufficient to hold the respondent guilty of insider trading.
SEBI argued inter alia that the Regulations set out a strict prohibition of insider trading5, which cannot be avoided on any grounds, including the materiality of impact or intent of the insider. On the other hand, the respondent argued that whether the information is price sensitive depends on the materiality of impact on price. The respondent also argued that the purpose of trading and intent for the trading, along with other relevant circumstances, must be considered before determining whether the insider is guilty of insider trading.
1 Judgment dated September 19, 2022, by Hon’ble Justices Indira Banerjee and V Ramasubramanian in Civil Appeal No. 563 of 2020
2 Regulation 2(ha) of the Regulations
3 Regulation 2(k) of the Regulations
4 Regulations 3 and 4 of the Regulations
5 Regulations 3 and 4 of the Regulations
The court appears to have found the respondent’s arguments more persuasive. It held that it is necessary to see whether the information will affect the security’s price materially. It also held that the activities of the insider must be examined and reasoned that if the trading is not driven by a motive for profit, the person cannot be guilty of insider trading. Specifically, it stated:
If a person enters into a transaction which is surely likely to result in loss, he cannot be accused of insider trading. In other words, the actual gain or loss is immaterial, but the motive for making a gain is essential.
The court determined on the facts of the case that the respondent’s actions were not motivated by the pursuit of underserving gains. It found in this case that because the UPSI was likely to increase the market price of the company’s securities on disclosure, the respondent’s sale of securities before disclosure did not amount to insider trading.
Sharad Kumar
Surabhi Katyal